Huntington Bank could be on hook for up to $73 million it handled in CyberNET scam

Press IllustrationScam mastermind Barton Watson, at top, casts a long shadow. Company officials Krista Kotlarz-Watson, his wife; James Horton, (third from top); Paul Wright and David Roepke were convicted after Watson's suicide -- which led to a separate case against his mother, Geraldine (bottom row).

A long-awaited, 127-page opinion handed down this week by U.S. Bankruptcy Court Judge Jeffrey Hughes says Columbus-based Huntington failed to act in good faith when it allowed CyberCo (also known as CyberNET) and one of its front companies, Teleservices, to continue funneling money through its bank accounts months after the bank began to suspect fraud.

As Hughes notes in an opinion that sometimes reads like a true-crime novel: “The details unfold like a tragic play.”

The CyberNET creditors’ case has some parallels to the much larger financial fraud case involving disgraced investment adviser Bernard Madoff. In that case, Madoff creditors are suing banks used by his firm to try to recover some of the billions of dollars they handled while allegedly turning a blind eye to red flags that could have prevented the dramatic losses.

CyberNET, with offices in downtown Grand Rapids, imploded in 2004 amid an FBI investigation that showed its founder, convicted felon Barton Watson, and others involved in the company bilked lenders out of millions of dollars tied to what was supposed to be a fast-growing technology services company.

It turned out that much of the company’s activity was based on fraud, with millions of dollars being pocketed by Watson, his wife and other company executives who lived lavish lifestyles.

In the long-running bankruptcy case, much effort has been made to assess who knew what about the scam and when.

A group of mostly out-of-state creditors for Teleservices sued Huntington, saying it was responsible for allowing the fraud to continue even after evidence emerged that all was not right at the company.

Huntington, they allege, ignored signs of wrongdoing by CyberNET to the detriment of others so that it could get paid back the more than $16 million it had loaned the company.

Huntington officials declined to comment other than to offer a brief statement about the case Friday: "While we have not yet fully reviewed the opinion that was filed on March 17, 2011 concerning this complex case, we can tell you that Huntington has vigorously contested the claims of this case since its inception and expects to continue to do so. We cannot provide further comment at this time."

According to court documents, Watson told equipment finance companies that Teleservices was its preferred vendor for buying computer server equipment. Those companies would issue checks to Teleservices, which would then send the money -- six and seven figure round-number checks -- to Huntington to cover CyberNET's line of credit and give the appearance of robust cash flow.

When Huntington asked about Teleservices, Watson explained it was a newly formed corporate finance and help desk arm for CyberNET that collected the company’s receivables, according to testimony by the bank’s executives.

Hughes’ ruling makes it clear Huntington was suspicious enough about Watson and CyberNET to ask the company to find a new lender almost a year before it was shut down.

But when CyberNET executives failed to do so, Huntington continued to extend its relationship with the company as Watson’s lies became more brazen and numerous red flags emerged.

“There came a point in time when Huntington became willfully blind,” said Douglas Donnell, an attorney with the Grand Rapids law firm Mika Meyers Beckett & Jones who represents the creditors group. “You don’t get to keep money from illegal enterprises if you didn’t act in good faith.”

John Anding, an attorney with another local law firm, Drew, Cooper & Anding, also representing creditors, called the opinion a vindication of “the principles we expect from the judicial system.”

“In this case, it was pretty simple,” he said. “The court said, ‘Look, you can’t turn a blind eye to activities that tell you that there is fraud afoot – or at least tell you there is wrongdoing afoot.”

Watson committed suicide in his $1 million Ada Township mansion in November 2004 after an FBI raid that led to CyberNET’s shutdown.

In his opinion, Hughes blasted Huntington’s then-regional security officer, Larry Rodriguez, for discovering in April 2004 that Watson was a felon convicted of fraud and not reporting that fact to his superiors and others who were investigating CyberNET inside the bank until August or September.

In particular, Hughes said Rodriguez might have prevented further fraud had he disclosed his findings to John Kalb, the bank’s regional credit officer who had expressed growing concerns about Watson:

“Had Rodriguez not withheld from Kalb Watson’s fraudulent past, Kalb and others at Huntington undoubtedly would have concluded that nothing at CyberCo could be accepted at face value, including the increasingly suspicious story of who Teleservices was and why it was transferring huge amounts of money to CyberCo.”

An earlier criminal check had turned up no criminal red flags because Watson had provided a false Social Security number.

Toward the end of CyberNET's existence, the bank’s executive team was fixated on getting repaid the money it was owed, regardless of where the money came from, Hughes said

Hughes said the bank had the obligation to show that it acted in good faith in the way it handled the CyberCo/Teleservices fiasco.

“Unfortunately for Huntington, Rodriguez’s lapse in judgment prevents it from meeting its burden,” Hughes wrote.

While Donnell said he expects the bank to appeal – a process that could take another two years to play out – the opinion is a just result.

“A recovery will do a lot to make the creditors whole,” he said.

In a conclusion that seems to suggest the parties begin discussing a settlement, Hughes wrote that Huntington could expect to owe far more than the $16.5 million it received from CyberCo in the months leading up to its demise.

“Unless something unforeseen occurs, Huntington should expect a judgment much larger than $16.5 million will enter against it once all the remaining issues are adjudicated.”

The total “recoverable against Huntington could be as much as $73,035,429.57,” Hughes wrote.